The current problems in the microfinance system in countries such as India  are the result of “the sector’s growing pains,”,says Els Boerhof of Dutch company Goodwell Investments. Her company invests in microfinance in India, but the sector has been severely hit by stories of huge interest rates, bogus credit providers and people driven to suicide by not being able to pay back their loans.

Recently, the government of the Indian state of Andhra Pradesh - itself the largest source of microcredit  in the region – announced tough new measures to stamp out bogus lenders. These loan companies very often demand sky-high interest rates of up to 30 percent, and are not afraid to use violence against those who can’t afford to pay back their small, but highly expensive debts.

Suicides
The main reason for these new measures is a reported increase in suicides among desperate small entrepreneurs, mostly farmers. Bad crops and other problems have left them with little or no money to pay off their debts. Although there is no definitive proof that the number of suicides has risen, the state government has been using the belief that there is to take action. The fact that elections are upcoming may have something to do with it.

Els Boerhof's Goodwell Investments puts money into microcredit institutions in developing countries such as India, Ghana and Nigeria. Ms Boerhof has herself just come back from India. There she attended the annual microfinance conference where the current crisis was top of the agenda. She says these alarming stories from the region don’t mean that the system of microfinance - in which small entrepreneurs can borrow small amounts of money - doesn’t work.

Growth
“I think this crisis is the result of the success of microfinance,” she told RNW. “If an industry grows uncontrollably, it usually attracts the wrong people as well. Also, private microfinance has  grown so fast that it has outpaced the heavily subsidised government programmes. Governments don’t really like that. The measures that have now been taken are partly a reaction to that”.

Planted firmly in ideals, but with a business approach, Goodwell Investments has seen the problems coming for a while, notably in Andhra Pradesh, which is India’s top microfinance region where more loans are issued than anywhere else in the country.

New players
“Due to its robust growth we saw a lot of new players coming onto the market,” Ms Boerhof says. “They tried to lure would-be clients with positive stories. Many people fell for them and signed contracts they simply couldn’t fulfill. Unfortunately, sometimes people fall for stories and promises that are simply too good to be true.”

Ethical manner
Goodwell Investments says it doesn’t do business with bogus lenders in India. “We only invest money in institutions that deal with these practices in a moral and ethical manner," Ms Boerhof notes. “Two of our microfinance partners are based in Andhra Pradesh and yes, they too have been hit by the current crisis. But I’m convinced they have nothing to do with any malpractices, as we constantly keep an eye on that.”

But how? ”Before we invest our money with these institutions, we agree on a mutual code of conduct. This is based on guidelines - issued by the World Bank - on how to issue financial services to poor people in an honest and transparent manner. We are also represented in the board of directors of these institutions, which means we are directly involved in their governance.”

Barred
The two institutions that have been hit by the crisis see hardly any money being paid back at the moment. “They have been barred from small villages by government officials,” Ms Boerhof says. “This means they can only collect around 30 percent of the amounts of money they should be getting back.”

Ms Boerhof acknowledges that the thousands of poor Indians who have taken out multiple heavy loans are having an extremely tough time: ”But you can’t put all the blame on a loan you can’t pay back,”’ she says.
"If the crops fail, which means a poor farmer can’t pay off his debts, who’s to blame? Is it the money lender or is it nature?" 

Reshaping
"It’s a good thing that the industry is reshaping itself. From April next year, a new credit bureau will be launched where every microcredit loan will have to be registered. This makes it easier for lenders to know whether people already have outstanding debts.”

The Indian government has announced new regulations for January. But the sector wants more action. Ms Boerhof agrees: “‘As long as nothing happens, the small entrepreneurs who need our help desperately, will be left out in the cold."